Warren Buffet likes UnitedHealth (UNH)
02-23-07: You know a stock is trading at a deep discount when Warren Buffet decides to take a stake in a company. In the latest Berkshire Hathaway filing, Warren Buffet bought approximately a million shares of United Health (UNH). Interestingly, we had recently evaluated UNH last month and identified it as an undervalued stock. We are pleasantly surprise to see our views are in the same ball park as the mastermind of value investing. Here are some reasons why we believed UNH is still a buy.
While UNH stock performance last year was flat, primarily due to the stock options backdating scandal; we believed the worse is behind this company. One thing to keep in mind with any company embroiled in the stock options backdating scandal; while it is a serious issue; it is also in the past. The worse the SEC can do is fine the company and make them restate their earnings. It is the future prospect that is more important. From what we can tell, UNH future and business remains sound.
In comparing the current stock valuation to its peers, UNH is actually a bit higher than the industry average in respect to its price to earnings (P/E) ratio; however this does not necessarily mean the stock is expensive. All it means is Wall St. believes UNH's growth rate will be higher than its competitors; thus the higher valuation. We feel at this level the stock’s downside risk is minimal.
Flush with cash and a sound business, UNH is still a great company to invest in for the long term. Currently trading at around $53 per share, we believed the risk/reward remains favorable; the upside potential outweighs the downside. If this was not the case, Warren Buffet would not have invested in UNH.
In looking closely at the financials of UNH, the intrinsic value of this company is much greater than its present valuation. The company is growing approximately 22 percent year over year and currently trades with a P/E of 18. Another characteristic we noticed while evaluating UNH’s income statement is the healthy recurring revenue. Recurring revenue with consistent growth makes for a “quality earning”. In our opinion, the current valuation represents a buying opportunity.
While we are on the subject of HMO, another HMO stock we believed is undervalued is Aetna (AET). We recently evaluated AET just a few days ago when it was trading in the low 40s. The stock is up 4 points since February 13, 2007.
